The origin of the business expression “sharpen your pencil” is a bit murky, but its meaning is clear: It’s sales code for “give me a better offer.” As an early-stage entrepreneur, it’s a phrase you grow used to hearing. You’ll be negotiating with a customer. They’ll take a look at the contract and come back with something like, “Looks great, but can you sharpen your pencil?” They’re willing to give you the business, in other words, if you’re willing to lowball the price. Should you?
Now, I’ve got nothing against sharpening my pencil. In fact, there are lots of times when cutting a deal makes perfect sense. Say you’re just getting off the ground and desperately need revenue or proof of product. Or maybe it’s a dream client, someone who’s a pleasure to work with or whom you can upsell down the road.
But I’ve learned an important lesson over the years. There are times to sharpen your pencil to get customers. And there are also times to kill off your existing customers–with a blunt pencil. In other words, price them out the door. Raise your fees to the point where they’re compelled to take their business elsewhere.
I know this sounds a little crazy. Why would you want to drive away your own clients? Well, there are actually lots of reasons. Some may be major headaches who completely sap the joy out of doing business. Others may demand time and attention that far exceed the revenue they’re bringing in. Still others may be so high-maintenance that they keep you from pursuing new opportunities or focusing on growing your company.
Entrepreneurs tend to have a fierce loyalty to the customers they’ve worked so hard to procure. But the bottom line is that some of these customers represent a serious business liability, not an asset. And these “problem clients” are ideal candidates for bumping off with a blunt pencil.
This wasn’t a realization I arrived at easily. I founded the agency that would go on to build Hootsuite during the worst days of the 2000 tech bust. Forget about finding investors; even lining up customers was a challenge. So during my first few years of business, there was plenty of pencil sharpening. I took on whatever web projects came my way–often acceding to some seriously discounted prices–just to keep the lights on and pay my staff. I got used to working on razor-thin margins for clients who demanded the world.
But, with time, the business climate shifted. The economy righted itself, tech recovered, and companies had money to spend on software and services again. Not to mention my own agency had finally found its sweet spot and developed a reputation for top-notch work–innovative marketing apps and tools for the social media era. We began charging more reasonable rates and found that clients were willing to pay.
There was just one problem: We still had a huge roster of older clients to service, companies that had bent us over a barrel and signed contracts at ultra-low rates. Rather than pursuing new, more profitable, and more rewarding business, our team was instead bogged down tending to a packed lineup of pencil sharpeners. It was demoralizing. It didn’t make business sense. And something had to give.
Now might be a good time for a quick aside on loyalty to customers. It’s no secret that the best companies keep their customers happy. Amazon has built an empire on sterling customer service, generous return policies, and lightning-fast delivery. Customers are a company’s lifeblood, and treating them right has been critical to building Hootsuite. We’re the most widely used social media management tool in the world because our 10-million-plus users know they can tweet us and get a response typically within 30 minutes.
But I’d argue that it’s a two-way street. Especially in service industries (and I’d include software-as-a-service in that category), there’s something of an unwritten code for customers: Be reasonable. It’s perfectly fair to expect a lot from a company. Set the bar high, by all means. It’s unfair, however, to expect a level of service wholly out of proportion with what you’re actually paying or offering to pay.
Ironically, it tends to be clients who pay the least that demand the most, expecting white-glove service for fast-food prices. I was drowning in these customers initially–until I discovered the blunt pencil.
When it came time to renew their contracts, there was some serious sticker shock waiting for them. Instead of keeping rates steady or nudging them up gradually, I charged exactly how much I felt we deserved. I factored in not only hours spent but, in essence, compensation for pain and suffering. The worst customers saw their rates triple or quadruple.
So why didn’t I just drop these customers altogether? For me, it came down to economics. We were perfectly willing to accommodate difficult clients, provided they paid their fair share. I wasn’t about to throw away business. But for the most “challenging” customers, a significant premium had to be paid to make it worth our while.
The result? Well, I lost a whole lot of customers. (A surprising amount, however, did stick around–which says something about the deal they were getting.) But this freed up my team to focus on bigger and better projects.
Instead of spending hours on high-maintenance, low-revenue clients, we could set our sights on more ambitious targets. In fact, it was around this time that I put seven employees to work on an especially promising project: a new tool to manage all your social networks from one site. If not for a blunt pencil, it’s quite possible Hootsuite would never have gotten out of beta.